As you make your way as an investor, you’ll probably hear a lot about diversifying your portfolio, or portfolio diversification, to insulate you from the ups and downs of the market. While there is a good deal of truth to it, the actual practice isn’t quite as easy to master, as these common situations illustrate.
Are you making these portfolio diversification mistakes?
Too Much Diversity
Using mathematical modeling, researchers found that holding between 20 and 30 different securities provided the best returns, and there was no discernable difference in the rate of financial gains by holding more.
If you have some securities wrapped up in mutual funds and others in ETFs, you may have duplicates within your portfolio. The immediate problems associated with duplication are the fees that financial managers charge. You may be paying twice for the same security if you have multiple holdings in your portfolio.
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Holding Commodities Too Long
Commodities aren’t meant to be held, but rather traded because they’re vulnerable to exogenous forces. A glance at oil prices since 1950 illustrates how volatile commodity markets can be, and if you’re caught when the market starts to slide, you could lose a good deal of money.
Buying Foreign Stocks and Funds
Unless you pay close attention to local conditions, you’re running a risk by putting money into foreign markets. It’s difficult and time consuming to stay abreast of the daily events that can affect the value of your holdings outside of the country.
You might be able to achieve the same international diversification in your portfolio by investing in large U.S. corporations that have a strong presence in worldwide markets. Instead of doing the hard exploratory work, it’s easier to coattail off their work.
These companies employ professional economic and market experts who monitor the macro- and micro-economic conditions in countries where they’re located. Their research budgets are large, which gives them access to proprietary and public data that the majority of people can’t access.
Being Single-Minded About Asset Classes
While it’s important to focus on investments in which you have familiarity and interest, taking it too far could hurt you. Focusing on one industry alone leaves you vulnerable to its business cycle. Instead, pick a few different sectors to insulate you to changing markets.
For example, a mix of high tech, health care, and real estate will cover you against market swings. Health care and housing are basic necessities and react more slowly to slowing markets, especially in sectors that are driven by consumer discretion.
The value of real estate does fluctuate in response to the primary economic drivers, but one of the safer vehicles for short and long term gains lies in rental housing. It provides a predicable monthly income, appreciates over the long haul and provides tax benefits.
Although it requires more time and upfront money than other investments, property management companies reduce and simplify owner involvement. Turnkey property management services typically include property acquisition, lease-up, maintenance and accounting. Except in extreme markets, residential property holds its value and appreciates. Mixing some into your portfolio helps balance it and protect you from the market fluctuations, while providing a positive cash flow.
See also How to Create a Property Investment Timeline
Talk to one of our investment specialists to learn how JWB can help you earn passive income through long term real estate investing.